White House Chaos

President Elect Trump represents the biggest risk to the benign outlook. Our central case rests on a policy agenda from the Trump White House which broadly mimics in large part his first Presidency. We expect tax cuts and deregulation, which should be positive for equity markets and are relatively easy to get through Congress. We also expect some new tariffs and a reduction in immigration, which should be negative for equity markets. But on net, we see the equity market impact of this as roughly balanced and the bond market impact as negative (given prospects for higher inflation). 

However, the past is not necessarily prologue and we could end up with wildly different outcomes. If Trump neglects the tax cuts and deregulation aspects of his agenda and manages to implement his tariff and immigration campaign proposals fully, we think this would be a significant negative shock for equity markets. The impact would be highly inflationary and stymie economic growth. Otherwise, Trump is a wild card in general, there is no telling what he will try and do while in office.

Fiscal Dominance

The giant pink elephant in the room is in the chart below. The US, alongside most other developed countries, is on a clearly unsustainable long-term fiscal path. A good part of the reason why interest rate hikes in 2022 and 2023 didn’t lead to a recession in the US was leftover household Covid savings and continued fiscal spending resulting in a widening of the US budget deficit. With no plan to reduce the deficit (Trump argues that his tax cuts will be paid for by tariff receipts, but no credible policy analysis suggests that this will be the case), the expectation is that the US debt pile will continue to grow indefinitely. The trajectory is worsened by an ageing population.